Why Some Natural Gas Is Worth $7.28

Energy Strategist (04/28/2010)
"The title of this week's issue isn't a prediction—it's reality.

Before you decide I'm crazy and close this e-mail, understand that I'm well aware that near-month natural gas futures traded on the New York Mercantile Exchange (NYMEX) are priced just over $4 per million British thermal units. And I'm aware of the prevailing view that natural prices will likely remain near record lows because of elevated levels of stored gas.

Those pundits are at least partially correct: U.S. natural gas storage levels are above the five-year average and, thanks to mild spring temperatures, have increased at a faster-than-normal pace in recent weeks.

I'm also not the first to tell you that the discovery and rapid development of several major unconventional natural gas shale fields over the past few years has revolutionized the industry and transformed the U.S. into the world's biggest natural gas producer. This is an astounding shift. Less than a decade ago, most energy industry analysts would have told you that U.S. gas imports in the form of liquefied natural gas (LNG) were set to soar as domestic production began an inevitable decline. Now U.S. LNG terminals sit idle, and there's talk of passing laws to encourage the use of natural gas in new markets such as transportation.

North America's strong gas production outlook, high storage levels and weak NYMEX gas prices seem to be completely at odds with the surge in drilling activity that's occurred since last summer.

Liquid Assets

. . .There are a few different ways to play the boom in drilling activity directed at natural gas liquids (NGLs) and crude oil. One is, of course, to focus on companies that own acreage in these wet natural gas and shale oil plays around the US and/or Canada.

Another even more levered play: Services and drilling firms with the advanced rigs and technical know-how to drill these complex fields. Shale fields often require drilling deep wells with lengthy horizontal legs. Such wells also require multiple fracturing stages to render them economically producible. In other words, producers require powerful equipment; every horizontal well drilled in the U.S. requires the purchase of far more services and equipment than a vertical well in a conventional field.

But income-oriented investors should also consider buying master limited partnerships (MLP) with exposure to natural gas gathering, processing and fractionation. Producers will need access to processing plants to separate valuable NGLs from the gas, fractionation plants to separate NGLs into their constituent components and terminals and storage facilities."

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